Since there are more opinions than possible outcomes to this burning enigma, I would like to start by making a proper disclaimer. If anybody tells you that they know for sure what is going to happen in the next 3, 6 , 9 or 12 months, run, don’t walk the other way. If you happen to have read our 2010 outlook you saw that I got pretty lucky even though I disagreed with most of the talking heads on Wall Street. Most of them predicted a 6-7% rate by years end and, although the market has been making a pretty big run over the past couple of weeks for higher rates, it is nowhere near those levels.
- Housing: The housing marking continues to be in an extremely shaky state. Although most politicians claim that there is a recovery in place, most homeowners have yet to experience the improvement or agree with Washington. The Case and Schiller report has shown some improvements but nothing solid enough to believe that a trend is in place or that the recovery is sustainable. There is little doubt that there are phenomenal bargains out there. The gap between owning vs. renting has become extremely narrow mainly due to extremely low interest rates. The biggest problem is that guidelines are tougher than ever. You do require pristine credit and/or significant documentation for people with very good or good credit to explain their blemishes. There will always be a demand for housing. Just like in 2010, in 2011 there will be life events that involve the need for housing. Marriages and births have not stopped or slowed down despite a sluggish economy. At some point in 2011 these couples will realize that the current opportunities for home ownership may never be as attractive as they are today. Regions of the country will recover faster than others in 2011. In my home state and county of San Diego, CA we have started to see a migration.
- Jobs: With the expansion of benefits up to and beyond the 99 weeks, many Americans are faced with the question of, why would I want to enter the job market at minimum wage when I can collect unemployment? Historically, construction has always represented the bulk of the job growth. With an anemic housing recovery, this sector will continue to suffer creating a vicious cycle and the cliche of “what comes first, the chicken or the egg?”. Most Americans will have to adopt a different mindset. The mindset that most fortunes have been made during the worse economic times. The evolution of the entrepreneur will have to take place first. That will create small businesses that coupled with tax benefits will hire eager to work individuals. 3 0ut of 4 jobs in America are created by small businesses. It would be a shame if Washington enters into a gridlock now that the republicans have taken the majority on the hill. The great news is that we have seen signs of a president that is willing to compromise.
- Interest Rates: The biggest elephant in the room. We cannot ignore that for every 1/4 of a percent hike in rates, buyers purchasing power decreases by an average of 9%. In simple terms, if interest continue to rise, home prices will have to decrease by an average of 9% per 0.25% increase in interest rates. Knowing our brilliant Fed Chairman this is scenario is not likely. We must follow the most important financial commandments of all: “NEVER FIGHT THE FED”. The last couple of weeks have brought rates back to the high 4′s % and they may get into the 5′s % but by all historical measures they remain extremely low. Let’s face it, we live in a job dependent recovery period. Until 3+ million jobs are created, our economy will not reach the “normalcy” that we saw before the “great recession”. Until then Mr. Bernanke will do whatever it takes to keep interest rates at bay as we saw in the 60 minutes interview in early December 2010.
There is no question that we are in uncharted territory. We must accept and welcome change. That will remain a constant for many years to come. He who adapts the best will prevail.
